After a tough year for investors in 2022, when both stocks and bonds moved lower, the first half of 2023 has proven to be strong for both stocks and bonds. With that, can we say it’s safe to embrace the traditional 60/40 portfolio again? Well, that depends on how you position your exposure within these asset classes. In our Midyear 2023 Portfolio Trends analysis, we found that financial advisors who have held longer-duration bonds in the fixed income sleeve of their moderate model portfolios have been able to rely on that diversification to counter-balance equity risk.
Higher duration paid off
For example, when there was an equity pullback in early March, the entire yield curve came down as US Treasury prices rose. In just two weeks, the 3-10 Year Treasury Index rose 4.4% – nearly the full-year return an investor in a 3-month T-Bill could expect to receive. As Figure 1 shows, moderate models with the best returns (1st quartile) in the first half of 2023 had the longest duration at 4.5 years. Portfolios with shorter-duration, more cash-like fixed income exposures had lower returns. If the equity markets experience a drawdown later this year, longer-duration fixed income should help offset equity losses. In the Natixis model portfolios, duration is slightly longer than the Bloomberg Aggregate Bond Index, which was 6.3 years as of July 31, 2023.